james v. united states, 366 u.s. 213 (1961)

7/26/2019 James v. United States, 366 U.S. 213 (1961)

1/35

366 U.S. 213

81 S.Ct. 1052

6 L.Ed.2d 246

Eugene C. JAMES, Petitioner,

v.UNITED STATES.

No. 63.

Argued Nov. 17, 1960.

Decided May 15, 1961.

Mr. Richard E. Gorman, Chicago, Ill., for petitioner.

Mr. Howard A. Heffron, New York City, for respondent.

Mr. Chief Justice WARREN announced the judgment of the Court and an

opinion in which Mr. Justice BRENNAN, and Mr. Justice STEWART

concur.

1 The issue before us in this case is whether embezzled funds are to be included

in the 'gross income' of the embezzler in the year in which the funds are

misappropriated under 22(a) of the Internal Revenue Code of 19391and

61(a) of the Internal Revenue Code of 1954.2

2 '(a) General definition.Except as otherwise provided in this subtitle, gross

income means all income from whatever source derived * * *.' 26 U.S.C. 61(a), 26 U.S.C.A. 61(a).

3 The facts are not in dispute. The petitioner is a union official who, with another

person, embezzled in excess of $738,000 during the years 1951 through 1954

from his employer union and from an insurance company with which the union

was doing business.3Petitioner failed to report these amounts in his gross

income in those years and was convicted for willfully attempting to evade the

federal income tax due for each of the years 1951 through 1954 in violation of 145(b) of the Internal Revenue Code of 19394and 7201 of the Internal

Revenue Code of 1954.5He was sentenced to a total of three years'

imprisonment. The Court of Appeals affirmed. 273 F.2d 5. Because of a


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conflict with this Court's decision in Commissioner of Internal Revenue v.

Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752, a case whose relevant facts

are concededly the same as those in the case now before us, we granted

certiorari. 362 U.S. 974, 80 S.Ct. 1059, 4 L.Ed.2d 1009.

4 In Wilcox, the Court held that embezzled money does not constitute taxable

income to the embezzler in the year of the embezzlement under 22(a) of theInternal Revenue Code of 1939. Six years later, this Court held, in Rutkin v.

United States, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833, that extorted money

does constitutes taxable income to the extortionist in the year that the money is

received under 22(a) of the Internal Revenue Code of 1939. In Rutkin, the

Court did not overrule Wilcox, but stated:

5 'We do not reach in this case the factual situation involved in Commissioner of

Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752. Welimit that case to its facts. There embezzled funds were held not to constitute

taxable income to the embezzler under 22(a).' Id., 343 U.S. at page 138, 72

S.Ct. at page 576.6

6 However, examination of the reasoning used in Rutkin leads us inescapably to

the conclusion that Wilcox was thoroughly devitalized.

7 The basis for the Wilcox decision was 'that a taxable gain is conditioned upon

(1) the presence of a claim of right to the alleged gain and (2) the absence of a

definite, unconditional obligation to repay or return that which would otherwise

constitute a gain. Without some bona fide legal or equitable claim, even though

it be contingent or contested in nature, the taxpayer cannot be said to have

received any gain or profit within the reach of Section 22(a).' Commissioner of

Internal Revenue v. Wilcox, supra, 327 U.S. at page 408, 66 S.Ct. at page 549.

Since Wilcox embezzled the money, held it 'without any semblance of a bona

fide claim of right,' ibid., and therefore 'was at all times under an unqualified

duty and obligation to repay the money to his employer,' ibid., the Court found

that the money embezzled was not includible within 'gross income.' But,

Rutkin's legal claim was no greater than that of Wilcox. It was specifically

found 'that petitioner had no basis for his claim * * * and that he obtained it by

extortion.' Rutkin v. United States, supra, 343 U.S. at page 135, 72 S.Ct. at

page 574. Both Wilcox and Rutkin obtained the money by means of a criminal

act; neither had a bona fide claim of right to the funds.7Nor was Rutkin's

obligation to repay the extorted money to the victim any less than that of

Wilcox. The victim of an extortion, like the victim of an embezzlement, has a

right to restitution. Furthermore, it is inconsequential that an embezzler may

lack title to the sums he appropriates while an extortionist may gain a voidable


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title. Questions of federal income taxation are not determined by such

'attenuated subtleties.' Lucas v. Earl, 281 U.S. 111, 114, 50 S.Ct. 241, 74 L.Ed.

731; Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 337, 74 L.Ed. 916.

Thus, the fact that Rutkin secured the money with the consent of his victim.

Rutkin v. United States, supra, 343 U.S. at p. 138, 72 S.Ct. at page 575, is

irrelevant. Likewise unimportant is the fact that the sufferer of an extortion is

less likely to seek restitution than one whose funds are embezzled. What isimportant is that the right to recoupment exists in both situations.

8 Examination of the relevant cases in the courts of appeals lends credence to our

conclusion that the Wilcox rationale was effectively vitiated by this Court's

decision in Rutkin.8Although this case appears to be the first to arise that is 'on

all fours' with Wilcox, the lower federal courts, in deference to the undisturbed

Wilcox holding, have earnestly endeavored to find distinguishing facts in the

cases before them which would enable them to include sundry unlawful gainswithin 'gross income.'9

9 It had been a well-established principle, long before either Rutkin or Wilcox,

that unlawful, as well as lawful, gains are comprehended within the term 'gross

income.' Section II B of the Income Tax Act of 1913 provided that 'the net

income of a taxable person shall include gains, profits, and income * * * from *

* * the transaction of any lawful business carried on for gain or profit, or gains

or profits and income derived from any source whatever * * *.' (Emphasissupplied.) 38 Stat. 167. When the statute was amended in 1916, the one word

'lawful' was omitted. This revealed, we think, the obvious intent of that

Congress to tax income derived from both legal and illegal sources, to remove

the incongruity of having the gains of the honest laborer taxed and the gains of

the dishonest immune. Rutkin v. United States, supra, 343 U.S. at page 138, 72

S.Ct. at page 575; United States v. Sullivan, 274 U.S. 259, 263, 47 S.Ct. 607,

71 L.Ed. 1037. Thereafter, the Court held that gains from illicit traffic in liquor

are includible within 'gross income.' Ibid. See also Johnson v. United States,318 U.S. 189, 63 S.Ct. 549, 87 L.Ed. 704; United States v. Johnson, 319 U.S.

503, 63 S.Ct. 1233, 87 L.Ed. 1546. And, the Court has pointed out, with

approval, that there 'has been a widespread and settled administrative and

judicial recognition of the taxability of unlawful gains of many kinds,' Rutkin

v. United States, supra, 343 U.S. at page 137, 72 S.Ct. at page 575. These

include protection payments made to racketeers, ransom payments paid to

kidnappers, bribes, money derived from the sale of unlawful insurance policies,

graft, black market gains, funds obtained from the operation of lotteries, incomefrom race track bookmaking and illegal prize fight pictures. Ibid.

The starting point in all cases dealing with the question of the scope of what is


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included in 'gross income' begins with the basic premise that the purpose of

Congress was 'to use the full measure of its taxing power.' Helvering v.

Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 556, 84 L.Ed. 788. And the Court

has given a liberal construction to the broad phraseology of the 'gross income'

definition statutes in recognition of the intention of Congress to tax all gains

except those specifically exempted. Commissioner of Internal Revenue v.

Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477; Helvering v.Stockholms Enskilda Bank, 293 U.S. 84, 8791, 55 S.Ct. 50, 5153, 79

L.Ed. 211. The language of 22(a) of the 1939 Code, 'gains or profits and

income derived from any source whatever,' and the more simplified language of

61(a) of the 1954 Code, 'all income from whatever source derived,' have been

held to encompass all 'accessions to wealth, clearly realized, and over which the

taxpayers have complete dominion.' Commissioner of Internal Revenue v.

Glenshaw Glass Co., 348 U.S. 426, 431, 75 S.Ct. 473, 477, 99 L.Ed. 483. A

gain 'constitutes taxable income when its recipient has such control over it that,as a practical matter, he derives readily realizable economic value from it.'

Rutkin v. United States, supra, 343 U.S. at page 137, 72 S.Ct. at page 575.

Under these broad principles, we believe that petitioner's contention, that all

unlawful gains are taxable except those resulting from embezzlement, should

fail.

11 When a taxpayer acquires earnings, lawfully or unlawfully, without the

consensual recognition, express or implied, of an obligation to repay andwithout restriction as to their disposition, 'he has received income which he is

required to return, even though it may still be claimed that he is not entitled to

retain the money, and even though he may still be adjudged liable to restore its

equivalent.' North American Oil Consolidated v. Burnet, supra, 286 U.S. at

page 424, 52 S.Ct. at page 615. In such case, the taxpayer has 'actual command

over the property taxedthe actual benefit for which the tax is paid,' Corliss v.

Bowers, supra (281 U.S. 376, 50 S.Ct. 336). This standard brings wrongful

appropriations within the broad sweep of 'gross income'; it excludes loans.When a law-abiding taxpayer mistakenly receives income in one year, which

receipt is assailed and found to be invalid in a subsequent year, the taxpayer

must nonetheless report the amount as 'gross income' in the year received.

United States v. Lewis, supra; Healy v. Commissioner, supra. We do not

believe that Congress intended to treat a law-breaking taxpayer differently. Just

as the honest taxpayer may deduct any amount repaid in the year in which the

repayment is made, the Government points out that, 'If, when, and to the extent

that the victim recovers back the misappropriated funds, there is of course areduction in the embezzler's income.' Brief for the United States, p. 24.10

12 Petitioner contends that the Wilcox rule has been in existence since 1946; that if


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Congress had intended to change the rule, it would have done so; that there was

a general revision of the income tax laws in 1954 without mention of the rule;

that a bill to change it11was introduced in the Eighty-sixth Congress but was

not acted upon; that, therefore, we may not change the rule now. But the fact

that Congress has remained silent or has re-enacted a statute which we have

construed, or that congressional attempts to amend a rule announced by this

Court have failed, does not necessarily debar us from re-examining andcorrecting the Court's own errors. Girouard v. United States, 328 U.S. 61, 69

70, 66 S.Ct. 826, 829830, 90 L.Ed. 1084; Helvering v. Hallock, 309 U.S.

106, 119122, 60 S.Ct. 444, 451453, 84 L.Ed. 604. There may have been

any number of reasons why Congress acted as it did. Helvering v. Hallock,

supra. One of the reasons could well be our subsequent decision in Rutkin

which has been thought by many to have repudiated Wilcox. Particularly might

this be true in light of the decisions of the Courts of Appeals which have been

riding a narrow rail between the two cases and further distinguishing them tothe disparagement of Wilcox. See notes 8 and 9, supra.

13 We believe that Wilcox was wrongly decided and we find nothing in

congressional history since then to persuade us that Congress intended to

legislate the rule. Thus, we believe that we should now correct the error and the

confusion resulting from it, certainly if we do so in a manner that will not

prejudice those who might have relied on it. Cf. Helvering v. Hallock, supra,

309 U.S. at page 119, 60 S.Ct. at page 451. We should not continue to confoundconfusion, particularly when the result would be to perpetuate the injustice of

relieving embezzlers of the duty of paying income taxes on the money they

enrich themselves with through theft while honest people pay their taxes on

every conceivable type of income.

14 But, we are dealing here with a felony conviction under statutes which apply to

any person who 'willfully' fails to account for his tax or who 'willfully' attempts

to evade his obligation. In Spies v. United States, 317 U.S. 492, 499, 63 S.Ct.364, 368, 87 L.Ed. 418, the Court said that 145(b) of the 1939 Code

embodied 'the gravest of offenses against the revenues,' and stated that

willfulness must therefore include an evil motive and want of justification in

view of all the circumstances. Id., 317 U.S. at page 498, 63 S.Ct. at page 367.

Willfulness 'involves a specific intent which must be proven by independent

evidence and which cannot be inferred from the mere understatement of

income.' Holland v. United States, 348 U.S. 121, 139, 75 S.Ct. 127, 137, 99

L.Ed. 150.

15 We believe that the element of willfulness could not be proven in a criminal

prosecution for failing to include embezzled funds in gross income in the year


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of misappropriation so long as the statute contained the gloss placed upon it by

Wilcox at the time the alleged crime was committed. Therefore, we feel that

petitioner's conviction may not stand and that the indictment against him must

be dismissed.

16 Since Mr. Justice HARLAN, Mr. Justice FRANKFURTER, and Mr. Justice

CLARK agree with us concerning Wilcox, that case is overruled. Mr. JusticeBLACK, Mr. Justice DOUGLAS, and Mr. Justice WHITTAKER believe that

petitioner's conviction must be reversed and the case dismissed for the reasons

stated in their opinions.

17 Accordingly, the judgment of the Court of Appeals is reversed and the case is

remanded to the District Court with directions to dismiss the indictment.

18 It is so ordered.

19 Reversed and remanded with directions.

20 Mr. Justice BLACK, whom Mr. Justice DOUGLAS joins, concurring in part

and dissenting in part.

21 On February 25, 1946, fifteen years ago, this Court, after mature consideration,and in accordance with what at that time represented the most strongly

supported judicial view, held, in an opinion written by Mr. Justice Murphy to

which only one Justice dissented, that money secretly taken by an embezzler

for his own use did not constitute a taxable gain to him under the federal

income tax laws. Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404,

66 S.Ct. 546, 90 L.Ed. 752. The Treasury Department promptly accepted this

ruling in a bulletin declaring that the 'mere act of embezzlement does not of

itself in taxable income,' although properly urging that 'taxable income mayresult to the embezzler, depending on the facts in the particular case.'1During

the fifteen years since Wilcox was decided, both this Court and Congress,

although urged to do so, have declined to change the Wilcox interpretation of

statutory 'income' with respect to embezzlement. In this case, however, a

majority of the Court overrules Wilcox. Only three of the members of the Court

who decided the Wilcox case are participating in this caseMr. Justice

FRANKFURTER, Mr. Justice DOUGLAS, and myself. Mr. Justice

DOUGLAS and I dissent from the Court's action in 'overruling' Wilcox andfrom the prospective way in which this is done. We think Wilcox was sound

when written and is sound now.


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I.

22 We dissent from the way the majority of the Court overrules Wilcox. If the

statutory interpretation of 'taxable income' in Wilcox is wrong, then James is

guilty of violating the tax evasion statute for the trial court's judgment

establishes that he embezzled funds and wilfully refrained from reporting them

as income. It appears to us that District Courts are bound to be confused as towhat they can do hereafter in tax-evasion cases involving 'income' from

embezzlements committed prior to this day. Three Justices vote to overrule

Wilcox under what we believe to be a questionable formula, at least a new one

in the annals of this Court, and say that although failure to report embezzled

funds has, despite Wilcox, always been a crime under the statute, people who

have violated this law in the past cannot be prosecuted but people who

embezzle funds after this opinion is announced can be prosecuted for failing to

report these funds as a 'taxable gain.' Three other Justices who vote to overruleWilcox say that past embezzlers can be prosecuted for the crime of tax evasion

although two of those Justices believe the Government must prove that the past

embezzler did not commit his crime in reliance on Wilcox. Thus, although it

was not the law yesterday, it will be the law tomorrow that funds embezzled

hereafter are taxable income; and although past embezzlers could not have been

prosecuted yesterday, maybe they can and maybe they cannot be prosecuted

tomorrow for the crime of tax evasion. (The question of the civil tax liability of

past embezzlers is left equally unclear.) We do not challenge the wisdom ofthose of our Brethren who refuse to make the Court's new tax evasion crime

applicable to past conduct. This would be good governmental policy even

though the ex post facto provision of the Constitution has not ordinarily been

thought to apply to judicial legislation. Our trouble with this aspect of the

Court's action is that it seems to us to indicate that the Court has passed beyond

the interpretation of the tax statute and proceeded substantially to amend it.

23 We realize that there is a doctrine with wide support to the effect that undersome circumstances courts should make their decisions as to what the law is

apply only prospectively.2Objections to such a judicial procedure, however,

seem to us to have peculiar force in the field of criminal law. In the first place, a

criminal statute that is so ambiguous in scope that an interpretation of it brings

about totally unexpected results, thereby subjecting people to penalties and

punishments for conduct which they could not know was criminal under

existing law, raises serious questions of unconstitutional vagueness.3Moreover,

for a court to interpret a criminal statute in such a way as to make punishmentfor past conduct under it so unfair and unjust that the interpretation should be

given only prospective application seems to us to be the creation of a judicial

crime that Congress might not want to create. This country has never been


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II.

sympathetic with judge-created crimes. Their rejection under our Constitution

was said to have been 'long since settled in public opinion' even as early as

1812 when the question first reached this Court in United States v. Hudson &

Goodwin, 7 Cranch 32, 3 L.Ed. 259. In that case this Court emphatically

declared that the federal courts have no common-law jurisdiction in criminal

cases. They are not 'vested with jurisdiction over any particular act done by an

individual in supposed violation of the peace and dignity of the sovereignpower.' Rather, '(t)he legislative authority of the Union must first make an act a

crime, affix a punishment to it, and declare the Court that shall have jurisdiction

of the offence.'4

24 In our judgment one of the great inherent restraints upon this Court's departure

from the field of interpretation to enter that of lawmaking has been the fact that

its judgments could not be limited to prospective application. This Court and in

fact all departments of the Government have always heretofore realized thatprospective lawmaking is the function of Congress rather than of the courts.

We continue to think that this function should be exercised only by Congress

under the constitutional system.

25 We think Wilcox was right when it was decided and is right now. It announced

no new, novel doctrine. One need only look at the Government's briefs in thisCourt in the Wilcox case to see just how little past judicial support could then

be mustered had the Government sought to send Wilcox to jail for his

embezzlement under the guise of a tax evasion prosecution. The Government

did cite many cases from many courts saying that under the federal income tax

law gains are no less taxable because they have been acquired by illegal

methods. This Court had properly held long before Wilcox that there is no

'reason why the fact that a business is unlawful should exempt it from paying

the taxes that if lawful it would have to pay.'5

We fully recognize thecorrectness of that holding in Wilcox:

26 'Moral turpitude is not a touchstone of taxability. The question, rather, is

whether the taxpayer in fact received a statutory gain, profit or benefit. That the

taxpayer's motive may have been reprehensible or the mode of receipt illegal

has no bearing upon the application of Section 22(a).'6

27 The Court today by implication attributes quite a different meaning orconsequence to the Wilcox opinion. One opinion argues at length the 'well-

established principle * * * that unlawful, as well as lawful, gains are

comprehended within the term 'gross income." Wilcox did not deny that; we do


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not deny that. This repeated theme of our Brethren is wholly irrelevant since the

Wilcox holding in no way violates the sound principle of treating 'gains' of

honest and dishonest taxpayers alike. The whole basis of the Wilcox opinion

was that an embezzlement is not in itself 'gain' or 'income' to the embezzler

within the tax sense, for the obvious reason that the embezzled property still

belongs, and is known to belong, to the rightful owner. It is thus a mistake to

argue that petitioner's contention is 'that all unlawful gains are taxable exceptthose resulting from embezzlement.'

28 As stated in Wilcox, that case was brought to us because of a conflict among

the Circuits. The Ninth Circuit in Wilcox had held that embezzled funds were

not any more 'taxable income' to the embezzler than borrowed funds would

have been.7The Fifth Circuit, in McKnight v. Commissioner, had decided the

same thing.8The Eighth Circuit, however, had decided in Kurrle v. Helvering

that embezzled funds were taxable income.9Comparison of the three opinionsreadily shows that the arguments of the Fifth and Ninth Circuits against

taxability of such funds were much stronger than the arguments of the Eighth

Circuit for such taxability. The whole picture can best to obtained from the

court's opinion in McKnight v. Commissioner, written by Judge Sibley, one of

the ablest circuit judges of his time. He recognized that the taxpayer could not

rely upon the unlawfulness of his business to defeat taxation if he had made a

'gain' in that business. He pointed out, however, that the ordinary embezzler 'got

no title, void or voidable, to what he took. He was still in possession as he wasbefore, but with a changed purpose. He still had no right nor color of right. He

claimed none.'10Judge Silbley's opinion went on to point out that the 'first

takings (of an embezzler) are, indeed, nearly always with the intention of

repaying, a sort of unauthorized borrowing. It must be conceded that no gain is

realized by borrowing, because of the offsetting obligation.'11Approaching the

matter from a practical standpoint, Judge Sibley also explained that subjecting

the embezzled funds to a tax would amount to allowing the United States 'a

preferential claim for part of the dishonest gain, to the direct loss and detrimentof those to whom it ought to be restored.'12He was not willing to put the owner

of funds that had been stolen in competition with the United States Treasury

Department as to which one should have a preference to get those funds.

29 It seems to us that Judge Sibley's argument was then and is now unanswerable.

The rightful owner who has entrusted his funds to an employee or agent has

troubles enough when those funds are embezzled without having the Federal

Government step in with its powerful claim that the embezzlement is a taxableevent automatically subjecting part of those funds (still belonging to the owner)

to the waiting hands of the Government's tax gatherer. We say part of the

owner's funds because it is on the supposed 'gain' from them that the embezzler


10/35

is now held to be duty-bound to pay the tax and history probably records few

instances of independently wealthy embezzlers who have had nonstolen assets

available for payment of taxes.

30 There has been nothing shown to us on any of the occasions when we have

considered this problem to indicate that Congress ever intended its income tax

laws to be construed as imposing what is in effect a property or excise tax onthe rightful owner's embezzled funds, for which the owner has already once

paid income tax when he rightfully acquired them. In our view, the Court today

does Congress a grave injustice by assuming that it has imposed this double tax

burden upon the victim of an embezzlement merely because someone has stolen

his money, particularly when Congress has refused requests that it do so. The

owner whose funds have been embezzled has done nothing but entrust an agent

with possession of his funds for limited purposes, as many of us have frequent

occasion to do in the course of business or personal affairs. Ordinarily theowner is not, and has no reason to be, at all aware of an embezzlement until

long after the first misuse occurs. If Congress ever did manifest an intention to

select the mere fact of embezzlement as the basis for imposing a double tax on

the owner, we think a serious question of confiscation in violation of the Fifth

Amendment would be raised. All of us know that with the strong lien

provisions of the federal income tax law an owner of stolen funds would have a

very rocky road to travel before he got back, without paying a good slice to the

Federal Government, such funds as an embezzler who had not paid the taxmight, perchance, not have dissipated. An illustration of what this could mean

to a defrauded employer is shown in this very case by the employer's loss of

some $700,000, upon which the Government claims a tax of $559,000.

31 It seems to be implied that one reason for overruling Wilcox is that a failure to

hold embezzled funds taxable would somehow work havoc with the public

revenue or discriminate against 'honest' taxpayers and force them to pay more

taxes. We believe it would be impossible to substantiate either claim.Embezzlers ordinarily are not rich people against whom judgments, even

federal tax judgments, can be enforced. Judging from the meager settlements

that those defrauded were apparently compelled to make with the embezzlers in

this very case, it is hard to imagine that the Treasury will be able to collect the

more than $500,000 it claims. And certainly the Wilcox case does not seem to

have been one in which the Government could have collected any great amount

of tax. The employer's embezzled $11,000 there went up in gambling houses.

The scarcity of cases involving alleged taxes due from embezzlers is anotherindication that the Government cannot expect to make up any treasury deficits

with taxes collected from embezzlers and thieves, especially when the cost to

the Government of investigations and court proceedings against suspected


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III.

individuals is considered. And, as already indicated, to the extent that the

Government could be successful in collecting some taxes from embezzlers, it

would most likely do so at the expense of the owner whose money had been

stolen.

32 It follows that, except for the possible adverse effect on rightful owners, the

only substantial result that one can foresee from today's holding is that theFederal Government will, under the guise of a tax evasion charge, prosecute

people for a simple embezzlement. But the Constitution grants power to

Congress to get revenue not to prosecute local crimes. And if there is any

offense which under our dual system of government is a purely local one which

the States should handle, it is embezzlement or theft. The Federal Government

stands to lose much money by trying to take over prosecution of this type of

local offense. It is very doubtful whether the further congestion of federal court

dockets to try such local offenses is good for the Nation, the States or thepeople. Here the embezzler has already pleaded guilty to the crime of

embezzlement in a state court, although the record does not show what

punishment he has received. Were it not for the novel formula of applying the

Court's new law prospectively, petitioner would have to serve three years in

federal prison in addition to his state sentence. This graphically illustrates one

of the great dangers of opening up the federal tax statutes, or any others, for use

by federal prosecutors against defendants who not only can be but are tried for

their crimes in local state courts and punished there. If the people of thiscountry are to be subjected to such double jeopardy and double punishment,

despite the constitutional command against double jeopardy, it seems to us it

would be far wiser for this Court to wait and let Congress attempt to do it.

33 The Wilcox case was decided fifteen years ago. Congress has met every year

since then. All of us know that the House and Senate Committees responsiblefor our tax laws keep a close watch on judicial rulings interpreting the Internal

Revenue Code. Each committee has one or more experts at its constant

disposal. It cannot possibly be denied that these committees and these experts

are, and have been, fully familiar with the Wilcox holding. When Congress is

dissatisfied with a tax decision of this Court, it can and frequently does act very

quickly to overturn it.13On one occasion such an overruling enactment was

passed by both the House and Senate and signed by the President all within one

day after the decision was rendered by this Court.14

In 1954 Congress, afterextended study, completely overhauled and recodified the Internal Revenue

Code. The Wilcox holding was left intact. In the Eighty-sixth Congress and in

the present Eighty-seventh Congress bills have been introduced to subject


12/35

embezzled funds to income taxation.15They have not been passed. This is not

an instance when we can say that Congress may have neglected to change the

law because it did not know what was going on in the courts or because it was

not asked to do so, as was the case in Helvering v. Hallock.16Nor is this a case

in which subsequent affirmative congressional action manifested a view

inconsistent with our prior decision, as was true in Girouard v. United States.17

What we have here instead is a case in which Congress has not passed bills thathave been introduced to make embezzled funds taxable and thereby make

failure to report them as imcome a federal crime. For this Court to hold under

such circumstances that the inherent ambiguity of legislative inaction gives the

Court license to repudiate the long-standing interpretation of the income tax

statute and thereby bring additional conduct within the tax evasion criminal

statute seems to us to be flagrantly violative of the almost universally accepted

axiom that criminal statutes are narrowly and strictly construed. Our Brethren

cite no precedent in which this or any other court in the English-speaking worldhas so deliberately overruled a long-standing prior interpretation of a statute in

order to create a crime which up to that time did not exist.

34 This Court as well as Congress was fully apprised of the various criticisms

made in some Courts of Appeals opinions and elsewhere against the Wilcox

holding, yet it has likewise until today steadfastly refused to overrule that

holding during these fifteen years. This has been in the face of the fact that the

Government expressly urged that we do so in 1955, nine years after Wilcox wasdecided and three years after the decision in Rutkin v. United States, 343 U.S.

130, 72 S.Ct. 571, 96 L.Ed. 833. On that occasion the Court of Appeals for the

Second Circuit, speaking through Judge Frank for himself and Judge Medina,

had held in the case of J. J. Dix, Inc. v. Commissioner that embezzled funds

were not taxable as income, relying wholly on the Wilcox decision.18Judge

Hincks dissented, saying that if the facts of Dix were not enough to distinguish

it from Wilcox he would not follow Wilcox. In urging us to grant certiorari, the

Government said that the case presented a recurring problem in theadministration of the income tax laws. One of the arguments the Government

presented for overruling Wilcox, strange as it may seem, was that '(s)everal

prosecutions have recently been authorized and are now pending in various

District Courts, even though the disputed income in those cases apparently

came from embezzlements or closely analogous crimes.'19And the next to the

last sentence of its petition was: 'In short, the question whether the proceeds of

embezzlement, unlike other illegal income, are to enjoy a preferred tax-exempt

status, will continue to perplex the lower courts until it is settled by thisCourt.'20We denied certiorari.21There is surely less reason to repudiate and

'devitalize' Wilcox now, six years after the Court, as composed at that time,

refused to overrule it.


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IV.

35 Of course the rule of stare decisis is not and should not be an inexorable one.

This is particularly true with reference to constitutional decisions involving

determinations beyond the power of Congress to change, but Congress can and

does change statutory interpretations. It is perfectly proper and right that it

should do so when it believes that this Court's interpretation of a statute

embodies a policy that Congress is against. But Congress has not taken

favorable action on bills introduced to overturn our Wilcox holding even afterwe declined the Government's request to reverse the identical holding in Dix,

the latter having occurred three years after the decision in Rutkin which our

Brethren now say may have misled Congress into thinking that we had

repudiated the Wilcox holding.

36 It seems to us that we gave the doctrine of stare decisis its proper scope in our

treatment of this Court's decision in Federal Baseball Club of Baltimore v.

National League of Professional Baseball Clubs, 259 U.S. 200, 42 S.Ct. 465, 66L.Ed. 898. In that case this Court had held for reasons given that professional

baseball was not covered by the antitrust acts. Congress was asked through the

years to change the law in this respect but declined to do so. In Toolson v. New

York Yankees, Inc., 346 U.S. 356, 74 S.Ct. 78, 79, 98 L.Ed. 64, we followed

the holding of that case without re-examination of the underlying issues 'so far

as that decision determines that Congress had no intention of including the

business of baseball within the scope of the federal antitrust laws.' Later we

were asked to extend the Federal Baseball case and to hold that the business ofboxing could not without congressional action be brought within the antitrust

laws. We emphatically declined to do so in United States v. International

Boxing Club, 348 U.S. 236, 75 S.Ct. 259, 99 L.Ed. 290, nor did we overrule

Toolson in that case, despite strong arguments that the reasoning of the Court in

the first baseball case was equally applicable to the business of boxing. We said

about the proposed exemption of boxing from the antitrust laws that '(t)heir

remedy, if they are entitled to one, lies in further resort to Congress.'22That

case and that statement fit this case precisely. In fact, as we are about toexplain, a far more meaningful distinction can be made between embezzlement

and extortion for purposes of this case than it was possible to make between

baseball and boxing for purposes of that case, as Mr. Justice

FRANKFURTER'S dissenting opinion in that case demonstrates.

37 If the Government wants to prosecute the local crime of embezzlement,

ostensibly because of 'tax evasion,' it seems clear to us that it should take its

request to Congress which has power to pass on it and which has, to date,refused to do what the Government asks us to do in this case.


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38 Our Brethren advance as a reason for overruling Wilcox the 1952 decision in

Rutkin v. United States, which was decided three years before we denied

certiorari in the Dix case. They say that 'the reasoning used in Rutkin leads us

inescapably to the conclusion that Wilcox was thoroughly devitalized.' This

follows, to some extent, the statement in the Government's brief that 'Wilcox

and Rutkin cannot be reconciled on the basis of asserted technical differences

between the extortionist and the embezzler. * * * The proper course, wesubmit, * * * is to recognize that the Wilcox rationale was rejected in Rutkin, is

unsound, and can no longer be regarded as having vitality. Embezzled funds

represent taxable gains.'23

39 There is no doubt that some of the reasoning in the Rutkin opinion rejected

some of the reasoning in the Wilcox opinion. But this it true only with respect

to the broad general standards formulated in the two cases, and such standards

of course cannot be accepted as universal panaceas to be mechanically appliedto solve all the concrete problems in cases like these. Moreover, the Rutkin

opinion expressly purported not to overrule Wilcox and specifically said that

Wilcox was still to govern cases fitting its facts, clearly meaning embezzlement

cases.24And the Government had not asked in Rutkin that Wilcox be overruled.

Its argument was that Wilcox was 'inapplicable' to the facts in the Rutkin

record. The Government's brief went on to emphasize that the record in Wilcox

showed only the bare receipt of money wholly belonging to another, while

Rutkin had received the money 'as a result of a bilateral agreement' and, as theCourt of Appeals had pointed out, 'with a 'semblance of a bona fide claim of

right', a conclusion fully substantiated by the testimony of both the petitioner

and the Government witness Reinfeld.'25The Government went on to

distinguish Rutkin further by pointing out that there was 'not the slightest hint

in the record' that Rutkin ever had an obligation to repay the funds he took.

40 After this Court was persuaded by the Government in Rutkin to accept its

distinctions between Rutkin and Wilcox, it seems rather odd to have theGovernment now contend that the two cases are irreconcilable. While we

disagreed, we can understand why the majority in Rutkin drew the distinctions

it did. Although the victim of either embezzlement or extortion ordinarily has a

legal right to restitution, the extortion victim, like a blackmail victim, can in a

sense be charged with complicity in bringing about the taxable event in that he

knowingly surrendered the funds to the extortionist, sometimes in payment of

an actual obligation. Unlike the victim of an ordinary theft, he generally knows

who has taken the property from him and he consents to the taking thoughunder duress; and unlike most victims of embezzlement, he is able to report the

taking to law enforcement officers during the taxable year and his failure to do

so might be considered a kind of continuing consent to the extortionist's


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dominion over the property. The longer he acquiesces the less likely it becomes

that the extortion victim ever will demand restitution;26but once the victim of

an embezzlement finds out that his property has been stolen, he most likely will

immediately make efforts to get it back. Thus, although we still think Rutkin

was wrongly decided for the reasons expressed in the dissenting opinion in that

case, we can understand the argument for application of a sort of caveat emptor

rule to persons who submit to blackmail or extortion, since it is far from certainthat they will ever expose themselves by seeking repayment of what they paid

out. The distinctions between crimes like embezzlement and crimes like

blackmail and extortion, therefore, are not merely technical, legalistic

'attenuated subleties' for purposes of this decision, but are differences based

upon practicalities such as often underlie the distinctions that have been

developed in our law.

41 In departing from both the Wilcox and Rutkin decisions today, our Brethrenoffer no persuasive reasons to prove that their judgment in overruling Wilcox is

better than that of the Justices who decided that case. It contributes nothing

new to the analysis of this problem to say repeatedly that the dishonest man

must be subject to taxation just as the honest. As already said, Chief Justice

Stone and the others sitting with him on the Wilcox Court fully accepted that

general principle and we do still. Applying it here, we would say the embezzler

should be treated just like the law-abiding, honest borrower who has obtained

the owner's consent to his use of the money.27It would be unthinkable to taxthe borrower on his 'gain' of the borrowed funds and thereby substantially

impair the lender's chance of ever recovering the debt. The injury that the

Government would inflict on the lender by making the borrower less able to

repay the loan surely would not be adequately compensated by telling the

lender that he can take a tax deduction for the loss, and it is equally small

comfort to the embezzlement victim for the Government, after taking part of

his property as a tax on the embezzler, to tell the victim that he can take a

deduction for his loss if he has any income against which to offset thededuction. There is, of course, one outstanding distinction between a borrower

and an embezzler, and that is that the embezzler uses the funds without the

owner's consent. This distinction can be of no importance for purposes of

taxability of the funds, however, because as a matter of common sense it

suggests that there is, if anything, less reason to tax the embezzler than the

borrower. But if this distinction is to be the reason why the embezzlement must

be taxed just as 'the gains of the honest laborer,' then the use of this slogan in

this case is laid bare as no more than a means of imposing a second punishmentfor the crime of embezzlement without regard to revenue considerations, the

effect on the rightful owner, or the proper role of this Court when asked to

overrule a criminal statutory precedent. The double jeopardy implications


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V.

would seem obvious,28and discussion of the serious inadvisability for other

reasons of thus injecting the Federal Government into local law enforcement

can be found in the dissenting opinion in Rutkin.

42 We regret very much that it seems to be implied that the writer of the Rutkin

opinion and those who agreed to it intended to overrule Wilcox when it is

manifest that the language the Court used in Rutkin was meant to leaveprecisely the opposite impression. We are sure that our Brethren at that time did

not intend to mislead the public, and it would be hard to imagine why they said

what they did in the Rutkin opinion had they not specifically considered and

rejected the possibility of overruling Wilcox then and there. We think it is

unjustifiable to say nine years after Rutkin that it 'devitalized' or 'repudiated' the

Wilcox holding when the Rutkin opinion said explicitly that Wilcox is still the

rule as to embezzlement. Congress has seen fit to let both decisions stand, and

we think the present Court should do the same.

43 Even if we were to join with our Brethren in accepting the Government's

present contention that Wilcox and Rutkin cannot both stand, we would

disagree as to which of the two decisions should now be repudiated. This is true

not only because we would feel less inhibition about narrowing rather than

broadening the reach of a previously construed criminal statute. Regardless ofsuch considerations, our conviction that the Rutkin case was wrongly decided

in this Court remains undiminished and has been further substantiated by the

subsequent events in that controversy, which show all the more clearly the

deplorable consequences that can result when federal courts subject people who

violate state criminal laws to a double or treble prosecution for the state crime

under the guise of attempted enforcement of federal tax laws.29

44 For the foregoing reasons, as well as the reasons stated in Mr. JusticeWHITTAKER'S opinion, we would reaffirm our holding in Commissioner of

Internal Revenue v. Wilcox, reverse this judgment and direct that the case be

dismissed.

45 Mr. Justice CLARK, concurring in part and dissenting in part as to the opinion

of THE CHIEF JUSTICE.

46 Although I join in the specific overruling of Commissioner of Internal Revenue

v. Wilcox, 1946, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752, in The Chief

Justice's opinion, I would affirm this conviction on either of two grounds. I


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believe that the Court not only devitalized Wilcox, by limiting it to its facts in

Rutkin v. United States, 1952, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833, but

that in effect the Court overruled that case sub silentio in Commissioner of

Internal Revenue v. Glenshaw Glass Co., 1955, 348 U.S. 426, 75 S.Ct. 473, 99

L.Ed. 483. Even if that not be true, in my view the proof shows conclusively

that petitioner, in willfully failing to correctly report his income, placed no bona

fide reliance on Wilcox.

47 Mr. Justice HARLAN, whom Mr. Justice FRANKFURTER joins, concurring

in part and dissenting in part as to the opinion of THE CHIEF JUSTICE.

48 I fully agree with so much of The Chief Justice's opinion as dispatches Wilcox

to a final demise. But as to the disposition of this case, I think that rather than

an outright reversal, which his opinion proposes, the reversal should be for a

new trial.

49 I share the view that it would be inequitable to sustain this conviction when by

virtue of the Rutkin-Wilcox dilemma it might reasonably have been thought by

one in petitioner's position that no tax was due in respect of embezzled moneys.

For as is pointed out, Rutkin did not expressly overrule Wilcox, but instead

merely confined it 'to its facts.' Having now concluded that Wilcox was

wrongly decided originally, the problem in this case thus becomes one of how

to overrule Wilcox 'in a manner that will not prejudice those who might have

relied on it.' 366 U.S. at page 221, 81 S.Ct. at page 1056.

50 It is argued, in reliance on Spies v. United States, 317 U.S. 492, 63 S.Ct. 364,

87 L.Ed. 418, and Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99

L.Ed. 150, that so long as Wilcox remained on the books the element of

'willfulness' required in prosecutions of this kind1'could not be proven,' and

hence, that the conviction of this petitioner fails without more. This would

mean, I take it, that no future prosecution or past conviction involving tax

derelictions of this nature, occurring during the Wilcox period, may be brought

or allowed to stand I cannot agree to such a disposition, which, in my view, is

warranted by neither principle nor authority and would carry mischievous

implications for the future.

51 The Spies and Holland cases, which are said to support outright reversal, stand

for no more than that where, as here, a criminal tax statute makes 'willfulness'an element of the offense, the Government must prove an 'evil motive and want

of justification in view of all the financial circumstances' on the part of the

defendant, in failing to do what was required of him. While I agree that in the


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present case this made germane on the issue of willfulness the petitioner's

reliance or nonreliance on the continued vitality of the Wilcox doctrine,2I can

find nothing in Spies or Holland which justifies the view that the mere

existence of Wilcox suffices alone to vitiate petitioner's conviction as a matter

of law. If, as appears to have been the case, there was erroneous failure to take

that factor into account at the trial on the issue of willfulness, the most that

should happen is that petitioner should be given a new trial. This indeed is whatSpies and Holland affirmatively indicate as the right solution of the problem

this case presents. In Spies, it was said (317 U.S. at pages 499500, 63 S.Ct. at

pages 368):

52 '* * * By way of Illustration, and not by way of limitation, we would think

affirmative willful attempt may be inferred from conduct such as keeping a

double set of books, making false entries or alterations, or false invoices or

documents, destruction of books or records, concealment of assets or coveringup sources of income, handling of one's affairs to avoid making the records

usual in transactions of the kind, and any conduct, the likely effect of which

would be to mislead or to conceal. If the tax-evasion motive plays any part in

such conduct the offense may be made out even though the conduct may also

serve other purposes such as concealment of other crime.

53 'In this case there are several items of evidence apart from the default in filing

the return and paying the tax which the Government claims will support aninference of willful attempt to evade or defeat the tax. These go to establish that

petitioner insisted that certain income be paid to him in cash, transferred it to

his own bank by armored car, deposited it, not in his own name but in the

names of others of his family, and kept inadequate and misleading records.

Petitioner claims other motives animated him in these matters. We intimate no

opinion. Such inferences are for the jury. If on proper submission the jury

found these acts, taken together with willful failure to file a return and willful

failure to pay the tax, to constitute a willful attempt to defeat or evade the tax,we would consider conviction of a felony sustainable.' To the same effect, see

Holland, supra, 348 U.S. at page 139, 75 S.Ct. at page 137.

54 In the case at hand, the evidence of devious financial arrangements might well

support the inference that petitioner's purpose was not only to commit the

embezzlement but also to secrete and immunize his gains from what he

considered to be his tax liabilities in respect of those gains. The District Court,

as the trier of the facts (there having been no jury), found that petitioner's actswere 'willful and were done in a knowing and conscious attempt to evade and

defeat' his tax obligations. But since it does not appear that petitioner's possible

reliance on the Wilcox doctrine was considered below, Spies and Holland make


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it appropriate for us to send the case back for a new trial. They do not support

foreclosing the Government from even undertaking to prove that the petitioner's

conduct was 'willful' in this respect.

55 An outright reversal is equally unsound on principle. I take it that our decisions

in the tax and any other field for that matter relate back to the actual

transactions with which they are concerned, and that that is only the normalconcomitant of the fact that we do not sit as an administrative agency making

rulings for the future, but rather adjudicate actual controversies as to rights and

liabilities under the laws of the United States. There can be, I think, two

justifications for barring a prosecution of this petitioner in the unusual

circumstances presented here: (1) that by reason of Rutkin having formally left

intact the Wilcox doctrine, petitioner did not have due warning of his possible

criminal liability; and (2) that the Court, in making new 'law' in Rutkin, should,

like the legislature, not impose criminal liability ex post facto.

56 As to the first consideration, where the defendant is charged in a case like this

with having 'willfully' violated the law, I believe that both reason and authority

require no more than that the trier of fact be instructed that it must take into

account in determining the defendant's 'evil motive and want of justification,'

Spies v. United States, 317 U.S. at page 498, 63 S.Ct. at page 368, his possible

reliance on Wilcox, which not until now has this Court explicitly stated was

wrongly decided. As far as fairness to this petitioner is concerned, I do not seewhy that is not amply accorded by the disposition which Spies itself

exemplifies. See page 243 of 366 U.S., page 1068 of 81 S.Ct., supra. On the

other hand, if the trier of fact, properly instructed, finds that the petitioner did

not act in bona fide reliance on Wilcox, but deliberately refused to report

income and pay taxes thereon knowing of his obligation to do so and not

relying on any exception in the circumstances, I do not see why even the

strictest definition of the element of 'willfulness' would not have been satisfied.

Willfulness goes to motive, and the quality of a particular defendant's motivewould not seem to be affected by the fact that another taxpayer similarly

situated had a different motive.

57 An altogether analogous situation was presented in United States v. Murdock,

290 U.S. 389, 54 S.Ct. 223, 226, 78 L.Ed. 381. In that case the respondent had

been convicted of willfully failing to supply information to the Bureau of

Internal Revenue in that he relied on the possibility of state prosecution as

justifying his invoking the federal privilege against self-incrimination. TheCourt said in that case:

58 '* * * He whose conduct is defined as criminal is one who 'willfully' fails to


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pay the tax, to make a return, to keep the required records, or to supply the

needed information. Congress did not intend that a person, by reason of a bona

fide misunderstanding as to his liability for the tax, * * * should become a

criminal by his mere failure to measure up to the prescribed standard of

conduct. * * *

59 'It follows that the respondent was entitled to the charge he requested withrespect to his good faith and actual belief. Not until this court pronounced

judgment in United States v. Murdock, 284 U.S. 141, 52 S.Ct. 63, 76 L.Ed.

210, (82 A.L.R. 1376,) had it been definitely settled that one under examination

in a federal tribunal could not refuse to answer on account of probable

incrimination under state law. The question was involved but not decided in

Ballman v. Fagin, 200 U.S. 186, 195, 26 S.Ct. 212, 50 L.Ed. 433, and

specifically reserved in United States ex rel. Vajtauer v. Com'r of Immigration,

273 U.S. 103, 113, 47 S.Ct. 302, 71 L.Ed. 560. The trial court could nottherefore properly tell the jury the defendant's assertion of the privilege was so

unreasonable and illfounded as to exhibit bad faith and establish willful

wrongdoing. This was the effect of the instructions given. We think the Circuit

Court of Appeals correctly upheld the respondent's right to have the question of

absence of evil motive submitted to the jury * * *.' (Emphasis supplied.)

60 It would seem that precisely the same disposition is in order in this case. Nor

do I think that distinctions in terms of the nature of the defendant's legalmisapprehension, its degree, its justifiability, or its source are either warranted

or would be manageable as a basis for deciding future cases.

61 Coming now to the other possible rationale for barring the prosecution of this

petitioner, it might be argued that petitioner at the time he failed to make his

return was not under any misapprehension as to the law, but indeed that at the

time and under the decisions of this Court his view of the law was entirely

correct. The argument not only seems to beg the question, but raises furtherquestions as to the civil liability of one situated in the circumstances of this

petitioner. Petitioner's obligation here derived not from the decisions of this or

any other court, but from the Act of Congress imposing the tax. It is hard to see

what further point is being made, once it is conceded that petitioner, if he was

misled by the decisions of this Court, is entitled to plead in defense that

misconception. Only in the most metaphorical sense has the law changed: the

decisions of this Court have changed, and the decisions of a court interpreting

the acts of a legislature have never been subject to the same limitations whichare imposed on legislatures themselves, United States Constitution, Art, I, 9,

10, forbidding them to make any ex post facto law3and in the case of States to

impair the obligation of a contract. Ross v. State of Oregon, 227 U.S. 150, 33


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S.Ct. 220, 57 L.Ed. 458; New Orleans Waterworks Co. v. Louisiana Sugar

Refining Co., 125 U.S. 18, 8 S.Ct. 741, 31 L.Ed. 607.

62 The proper disposition of this case, in my view, is to treat as plain error,

Fed.Rules Crim.Proc. 52(b), 18 U.S.C.A., the failure of the trial court as trier of

fact to consider whatever misapprehension may have existed in the mind of the

petitioner as to the applicable law, in determining whether the Government hadproved that petitioner's conduct had been willful as required by the statute. On

that basis I would send the case back for a new trial.

63 Mr. Justice WHITTAKER, whom Mr. Justice BLACK and Mr. Justice

DOUGLAS join, concurring in part and dissenting in part.

64 The starting point of any inquiry as to what constitutes taxable income must bethe Sixteenth Amendment, which grants Congress the power 'to lay and collect

taxes on incomes, from whatever source derived * * *.' It has long been settled

that Congress' broad statutory definitions of taxable income were intended 'to

use the full measure of (the Sixteenth Amendment's) taxing power.' Helvering

v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 556, 84 L.Ed. 788; Douglas v.

Willcuts, 296 U.S. 1, 9, 56 S.Ct. 59, 62, 80 L.Ed. 3. Equally well settled is the

principle that the Sixteenth Amendment 'is to be taken as written and is not to

be extended beyond the meaning clearly indicated by the language used.'

Edwards v. Cuba R. Co., 268 U.S. 628, 631, 45 S.Ct. 614, 615, 69 L.Ed. 1124.1

The language of the Sixteenth Amendment as well as our prior controlling

decisions, compels me to conclude that the question now before uswhether

an embezzler receives taxable income at the time of his unlawful takingmust

be answered negatively. Since the prevailing opinion reaches an opposite

conclusion, I must respectfully dissent from that holding, although I concur in

the Court's judgment reversing petitioner's conviction. I am convinced that

Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90

L.Ed. 752, which is today overruled, was correctly decided on the basis ofevery controlling principle used in defining taxable income since the sixteenth

Amendment's adoption.

65 The Chief Justice's opinion, although it correctly recites Wilcox's holding that

'embezzled money does not constitute taxable income to the embezzler in the

year of the embezzlement' (emphasis added), fails to explain or to answer the

true basis of that holding. Wilcox did not hold that embezzled funds may never

constitute taxable income to the embezzler. To the contrary, it expressly

recognized that an embezzler may realize a taxable gain to the full extent of the

amount taken, if an when it ever becomes his. The applicable test of taxable

income, i.e., the 'presence of a claim of right to the alleged gain,' of which


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Wilcox spoke, was but a correlative statement of the factor upon which the

decision placed its whole emphasis throughout, namely, the 'absence of a

definite, unconditional obligation to repay or return (the money).' 327 U.S. at

page 408, 66 S.Ct. at page 549. In holding that this test was not met at the time

of the embezzlement, the Wilcox opinion repeatedly stressed that the

embezzler had no 'bona fide legal or equitable claim' to the embezzled funds,

ibid.; that the victim never 'condoned or forgave the taking of the money andstill holds him liable to restore it,' id., 327 U.S. at page 406, 66 S.Ct. at page

548; and that the 'debtor-creditor relationship was definite and unconditional.'

Id., 327 U.S. at page 409, 66 S.Ct. at page 549. These statements all express the

same basic factthe fact which is emphasized most strongly in the opinion's

conclusion explaining why the embezzler had not yet received taxable income:

'Sanctioning a tax under the circumstances before us would serve only to give

the United States an unjustified preference as to part of the money which

rightfully and completely belongs to the taxpayer's employer.' Id., 327 U.S. atpage 410, 66 S.Ct. at page 550. (Emphasis added.)

66 However, Wilcox plainly stated that 'if the unconditional indebtedness is

cancelled or retired taxable income may adhere, under certain circumstances, to

the taxpayer.' 327 U.S. at page 408, 66 S.Ct. at page 549. More specifically, it

recognized that had the embezzler's victim 'condoned or forgiven any part of

the (indebtedness), the (embezzler) might have been subject to tax liability to

that extent,' id., 327 U.S. at page 410, 66 S.Ct. at page 550, i.e., in the tax yearof such forgiveness.

67 These statements reflect an understanding of, and regard for, substantive tax

law concepts solidly entrenched in our prior decisions. Since our landmark case

of United States v. Kirby Lumber Co., 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131, it

has been settled that, upon a discharge of indebtedness by an event other than

full repayment, the debtor realizes a taxable gain in the year of discharge to the

extent of the indebtedness thus extinguished. Such gains are commonlyreferred to as ones realized through 'bargain cancellations' of indebtedness, and

it was in this area, and indeed, in Kirby Lumber Co. itself, that the 'accession'

theory or 'economic gain' concept of taxable income, upon which The Chief

Justice's opinion today mistakenly relies, found its genesis. In that case, the

taxpayer, a corporation, had reduced a portion of its debt, with a corresponding

gain in assets, by purchasing its bonds in the open market at considerably less

than their issue price. Mr. Justice Holmes, who wrote the Court's opinion,

found it unnecessary to state the elementary principle that, so long as the bondsremained a fully enforceable debt obligation of the taxpayer, there could be no

taxable gain. However, when the taxpayer retired the debt by purchasing the

bonds for less than their face value, it 'made a clear (taxable) gain' and 'realized


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within the year an accession to income' in the amount of its bargain. 284 U.S. at

page 3, 52 S.Ct. at page 4.

68 This doctrine has since been reaffirmed and strengthened by us, see e.g.,

Helvering v. American Chicle Co., 291 U.S. 426, 54 S.Ct. 460, 78 L.Ed. 891;

Commissioner of Internal Revenue v. Jacobson, 336 U.S. 28, 69 S.Ct. 358, 93

L.Ed. 477, and by the lower federal courts in numerous decisions involving avariety of 'bargain cancellations' of indebtedness, as by a creditor's release

condoning or forgiving the indebtedness in whole or in part,2or by the running

of a Statute of Limitations barring the legal enforceability of the obligation.3In

none of these cases has it been suggested that a taxable gain might be realized

by the debtor at any time prior to the effective date of discharge, and as Wilcox

recognized, there is no rational basis on which to justify such a rule where the

debt arises through embezzlement.

69 An embezzler, like a common thief, acquires not a semblance of right, title, or

interest in his plunder, and whether he spends it or not, he is indebted to his

victim in the full amount taken as surely as if he had left a signed promissory

note at the scene of the crime. Of no consequence from any standpoint is the

absence of such formalities as (in the words of the prevailing opinion) 'the

consensual recognition, express or implied, or an obligation to repay.' The law

readily implies whatever 'consensual recognition' is needed for the rightful

owner to assert an immediately ripe and enforceable obligation of repaymentagainst the wrongful taker. These principles are not 'attenuated subtleties' but

are among the clearest and most easily applied rules of our law. They exist to

protect the rights of the innocent victim, and we should accord them full

recognition and respect.

70 The fact that an embezzler's victim may have less chance of success than other

creditors in seeking repayment from his debtor is not a valid reason for us

further to diminish his prospects by adopting a rule that would allow theCommissioner of Internal Revenue to assert and enforce a prior federal tax lien

against that which 'rightfully and completely belongs' to the victim.

Commissioner of Internal Revenue v. Wilcox, supra, 327 U.S. at page 410, 66

S.Ct. at page 550. The Chief Justice's opinion quite understandably expresses

much concern for 'honest taxpayers,' but it attempts neither to deny nor justify

the manifest injury that its holding will inflict on those honest taxpayers,

victimized by embezzlers, who will find their claims for recovery subordinated

to federal tax liens. Statutory provisions, by which we are bound, clearly andunequivocally accord priority to federal tax liens over the claims of others,

including 'judgment creditors.'4


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71 However, if it later happens that the debtor-creditor relationship between the

embezzler and his victim is discharged by something other than full repayment,

such as by the running of a Statute of Limitations against the victim's claim, or

by a release given for less than the full amount owed, the embezzler at that

time, but not before, will have made a clear taxable gain and realized 'an

accession to income' which he will be required under full penalty of the law to

report in his federal income tax return for that year. No honest taxpayer could

be harmed by this rule.

72 The inherent soundness of this rule could not be more clearly demonstrated

than as applied to the facts of the case before us. Petitioner, a labor union

official, concededly embezzled sums totaling more than $738,000 from the

union's funds, over a period extending from 1951 to 1954. When the shortages

were discovered in 1956, the union at once filed civil actions against petitioner

to compel repayment. For reasons which need not be detailed here, petitioner

effected a settlement agreement with the union on July 30, 1958, whereby, in

exchange for releases fully discharging his indebtedness, he repaid to the union

the sum of $13,568.50. Accordingly, at least so far as the present record

discloses, petitioner clearly realized a taxable gain in the year the releases were

executed, to the extent of the difference between the amount taken and the sum

restored. However, the Government brought the present action against him, not

for his failure to report this gain in his 1958 return, but for his failure to report

that he had incurred 'income' fromactually indebtedness tothe union ineach of the years 1951 through 1954. It is true that the Government brought a

criminal evasion presecution rather than a civil deficiency proceeding against

petitioner, but this can in no way alter the substantive tax law rules which alone

are determinative of liability in either case.

73 There can be no doubt that until the releases were executed in 1958, petitioner

and the union stood in an absolute and unconditional debtor-creditor

relationship, and, under all of our relevant decisions, no taxable event could

have occurred until the indebtedness was discharged for less than full

repayment. Application of the normal rule in such cases will not hinder the

efficient and orderly administration of the tax laws, any more than it does in

other situations involving 'bargain cancellations' of indebtedness. More

importantly, it will enhance the creditor's position by assuring that prior federal

tax liens will not attach to the subject of the debt when he seeks to recover it.

74 Notwithstanding all of this, The Chief Justice's opinion concludes that there is

no difference between embezzled funds and 'gains' from other 'illegal sources,'

and it points to the fact that Congress, in its 1916 revision of the 1913 Income


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Tax Act, omitted the word 'lawful' in describing businesses whose income was

to be taxed. The opinion then cites United States v. Sullivan, 274 U.S. 259, 47

S.Ct. 607, 71 L.Ed. 1037, in which it was held that, under the revised statute,

gains from illicit traffic in liquor must be reported in gross income, since there

is no 'reason why the fact that a business is unlawful should exempt it from

paying the taxes that if lawful it would have to pay.' Id., 274 U.S. at page 263,

47 S.Ct. at page 607. (Emphasis added.) That theory has been the primary basisfor taxing 'unlawful gains of many kinds' which the prevailing opinion today

recites, such as black market profits, gambling proceeds, money derived from

the sale of unlawful insurance policies, etc.5For, even if lawful, the gains from

such activities would clearly not be exempted from taxation. However, as

applied to embezzled funds, the holding in Sullivan contradicts, rather than

supports, the Court's conclusion today. Obviously, embezzlement could never

become 'lawful' and still retain its character. If 'lawful,' it would constitute

nothing more than a loan, or possibly a gift, to the 'embezzler,' neither of whichwould produce a taxable gain to him.

75 There is still another obvious and important distinction between embezzlement

and the varieties of illegal activity listed by the prevailing opinionone which

clearly calls for a different tax treatment. Black marketeering, gambling,

bribery, graft and like activities generally give rise to no legally enforceable

right of restitutionto no debtorcreditor relationship which the law will

recognize.6Condemned either by statute or public policy, or both, suchtransactions are void ab initio. Since any consideration which may have passed

is not legally recoverable, its recipient has realized a taxable gain, an 'accession

to in come,' as clearly as if his 'indebtedness' had been descharged by a full

release or by the running of a Statute of Limitations. As we have already shown

at length, quite the opposite is true when an embezzlement occurs; for then the

victim acquires an immediately ripe and enforceable claim to repayment, and

the embezzler assumes a legal debt equal to his acquisition.

76 To reach the result that it does today, The Chief Justice's opinion constructs the

following theory for defining taxable income:

77 'When a taxpayer acquires earnings, lawfuly or unlawfully, without the

consensual recognition, express or implied, of an obligation to repay and

without restriction as to their disposition, 'he has received income which he is

required to return, even though it may still be claimed that he is not entitled to

retain the money, and even though he may still be adjudged liable to restore itsequivalent.' North American Oil Consolidated v. Burnet, supra, 286 U.S. 417, at

page 424, 52 S.Ct. 613, at page 615, 76 L.Ed. 1197. In such case, the taxpayer

has 'actual command over the property taxedthe actual benefit for which the


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tax is paid,' Corliss v. Bowers, supra. This standard brings wrongful

appropriations within the broad sweep of 'gross income'; it excludes loans.

When a law-abiding taxpayer mistakenly receives income in one year, which

receipt is assailed and found to be invalid in a subsequent year, the taxpayer

must nonetheless report the amount as 'gross income' in the year received.

United States v. Lewis, supra; Healy v. Commissioner, supra.'

78 This novel formula finds no support in our prior decisions, least of all in those

which are cited. Corliss v. Bowers, 281 U.S. 376, 50 S.Ct. 336, 74 L.Ed. 916,

involved nothing more than an inter vivos trust created by the taxpayer to pay

the income to his wife. Since he had reserved the power to alter or abolish the

trust at will, its income was taxable to him under the express provisions of

219(g), (h) of the Revenue Act of 1924, 26 U.S.C.A. 166, 167. North

American Oil Consolidated v. Burnet, 286 U.S. 417, 52 S.Ct. 613, 615, 76

L.Ed. 1197, is the case which introduced the principle since used to facilitateuniformity and certainty in annual tax accounting procedure, i.e., that a

taxpayer must report in gross income, in the year in which received, money or

property acquired under a 'claim of right'a colorable claim of the right to

exclusive possession of the money or property. Thus, in its complete form, the

sentence in North American Oil from which the above-quoted fragment was

extracted reads: 'If a taxpayer receives earnings under a claim of right and

without restriction as to its (sic) disposition, he has received income which he is

required to return, even though it may still be claimed that he is not entitled toretain the money, and even though he may still be adjudged liable to restore its

equivalent.' Id., 286 U.S. at page 424, 52 S.Ct. at page 615. (Emphasis added.)

But embezzled funds, like stolen property generally, are not 'earnings' in any

sense and are held without a vestige of a colorable claim of right; they

constitute the principal of a debt. Of no significance whatever is the formality

of 'consensual recognition, express or implied' of an obligation to repay. By

substituting this meaningless abstraction in place of the omitted portion of the

North American Oil test of when a receipt constitutes taxable income, theprevailing opinion today goes far beyond overruling Wilcoxit reduces a

substantial body of tax law into uncertainty and confusion. The above-cited

case of United States v. Lewis, 340 U.S. 590, 71 S.Ct. 522, 95 L.Ed. 560,

decided 19 years after North American Oil, demonstrates the truth of this. For

there we said:

79 'The 'claim of right' interpretation of the tax laws has long been used to give

finality to (the accounting) period, and is not deeply rooted in the federal taxsystem. * * * We see no reason why the Court should depart from this well-

settled interpretation merely because it results in an advantage or disadvantage

to a taxpayer.' 340 U.S. at page 592, 71 S.Ct. at page 523.


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22. Gross Income.

'(a) General definitions.'Gross income' includes gains, profits, and income

derived from salaries, wages, or compensation for personal service * * * of

whatever kind and in whatever form paid, or from professions, vocations,

trades, businesses, commerce, or sales, or dealings in property, whether real or

personal, growing out of the ownership or use of or interest in such property;

also from interest, rent, dividends, securities, or the transaction of any businesscarried on for gain or profit, or gains or profits and income derived from any

source whatever. * * *' 26 U.S.C. (1952 ed.) 22(a), 26 U.S.C.A. 22(a).

61. Gross Income Defined.

Petitioner has pleaded guilty to the offense of conspiracy to embezzle in the

Court of Essex County, New Jersey.

145. Penalties.

'(b) Failure to collect and pay over tax, or attempt to defeat or evade tax.Any

person required under this chapter to collect, account for, and pay over any tax

imposed by this chapter, who willfully fails to collect or truthfully account for

and pay over such tax, and any person who willfully attempts in any manner to

evade or defeat any tax imposed by this chapter or the payment thereof, shall, in

addition to other penalties provided by law, be guilty of a felony and, upon

conviction thereof, be fined not more than $10,000 or imprisoned for not more

than five years, or both, together with the costs of prosecution.' 26 U.S.C. (1952

ed.) 145(b), 26 U.S.C.A. 145(b).

80 The same principle was reiterated and applied in Healy v. Commissioner, 345

U.S. 278, 73 S.Ct. 671, 97 L.Ed. 1007.

81 The supposed conflict between Wilcox and Rutkin, upon which The Chief

Justice's opinion seeks to justify its repudiation of Wilcox,7has been adequately

treated in the opinion of Mr. Justice BLACK, and I agree with him that those

cases were fully intended to be, and are, reconcilable, both on their controllingfacts and applicable law. If the unnecessarily broad language used in the Rutkin

opinion has misled any of the lower federal courts in their understanding of the

principles underlying Wilcox, we should clarify their understanding at this

time, and continue our adherence to 'a prior doctrine more embracing in its

scope, intrinsically sounder, and verified by experience.' Helvering v. Hallock,

309 U.S. 106, 119, 60 S.Ct. 444, 451, 84 L.Ed. 604.

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7201. Attempt to Evade or Defeat Tax.

'Any person who willfully attempts in any manner to evade or defeat any tax

imposed by this title or the payment thereof shall, in addition to other penalties

provided by law, be guilty of a felony and, upon conviction thereof, shall be

fined not more than $10,000, or imprisoned not more than 5 years, or both,

together with the costs of prosecution.' 26 U.S.C. 7201, 26 U.S.C.A. 7201.

The dissenters in Rutkin stated that the Court had rejected the Wilcox

interpretation of 22(a). Id., 343 U.S. at page 140, 72 S.Ct. at page 577.

The Government contends that the adoption in Wilcox of a claim of right test as

a touchstone of taxability had no support in the prior cases of this Court; that

the claim of right test was a doctrine invoked by the Court in aid of the concept

of annual accounting, to determine when, not whether, receipts constituted

income. See North American Oil Consolidated v. Burnet, 286 U.S. 417, 52S.Ct. 613, 76 L.Ed. 1197; United States v. Lewis, 340 U.S. 590, 71 S.Ct. 522,

95 L.Ed. 560; Healy v. Commissioner, 345 U.S. 278, 73 S.Ct. 671, 97 L.Ed.

1007. In view of our reasoning set forth below, we need not pass on this

contention. The use to which we put the claim of right test here is only to

demonstrate that, whatever its validity as a test of whether certain receipts

constitute income, it calls for no distinction between Wilcox and Rutkin.

In Marienfeld v. United States, 214 F.2d 632, the Eighth Circuit stated, 'Wefind it difficult to reconcile the Wilcox case with the later opinion of the

Supreme Court in Rutkin * * *.' Id., at page 636. The Second Circuit

announced, in United States v. Bruswitz, 219 F.2d 59, 'It is difficult to perceive

what, if anything, is left of the Wilcox holding after Rutkin * * *.' Id., at page

61. The Seventh Circuit's prior decision in Macias v. Commissioner, 255 F.2d

23, observed, 'If this reasoning (of Rutkin) had been employed in Wilcox, we

see no escape from the conclusion that the decision in that case would have

been different. In our view, the Court in Rutkin repudiated its holding inWilcox; certainly it repudiated the reasoning by which the result was reached in

that case.' Id., at page 26.

For example, Kann v. Commissioner, 3 Cir., 210 F.2d 247, was differentiated

on the following grounds: the taxpayer was never indicted or convicted of

embezzlement; there was no adequate proof that the victim did not forgive the

misappropriation; the taxpayer was financially able to both pay the income tax

and make restitution; the taxpayer would have likely received most of themisappropriated money as dividends. In Marienfeld v. United States, supra, the

court believed that the victim was not likely to repudiate. In United States v.

Wyss, 7 Cir., 239 F.2d 658, the distinguishing factors were that the district

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judge had not found as a fact that the taxpayer embezzled the funds and the

money had not as yet been reclaimed by the victim. See also Briggs v. United

States, 4 Cir., 214 F.2d 699, 702; Prokop v. Commissioner, 7 Cir., 254 F.2d

544, 554555. Cf. J. J. Dix, Inc., v. Commissioner, 2 Cir., 223 F.2d 436.

Petitioner urges upon us the case of Alison v. United States, 344 U.S. 167, 73

S.Ct. 191, 97 L.Ed. 186. But that case dealt with the right of the victim of anembezzlement to take a deduction, under 23(e) and (f) of the 1939 Code, in

the year of the discovery of the embezzlement rather than the year in which the

embezzlement occurred. The Court held only 'that the special factual

circumstances found by the District Courts in both these cases justify

deductions under I.R.C., 23(e) and (f) and the longstanding Treasury

Regulations applicable to embezzlement losses.' Id., 344 U.S. at page 170, 73

S.Ct. at page 192. The question of inclusion of embezzled funds in 'gross

income' was not presented in Alison.

H.R. 8854, 86th Cong., 1st Sess.

G.C.M. No. 24945, 19462 Cum.Bull. 27, 28. This was precisely in accord

with this Court's statement of the proper rule in the Wilcox opinion:

'Taxable income may arise, to be sure, from the use or in connection with the

use of such (embezzled) property. * * * But apart from such factors the bare

receipt of property or money wholly belonging to another lacks the essentialcharacteristics of a gain or profit within the meaning of Section 22(a).' 327 U.S.

at page 408, 66 S.Ct. at page 549.

See, for example, Great Northern R. Co. v. Sunburst Oil & Refining Co., 287

U.S. 358, 53 S.Ct. 145, 77 L.Ed. 360.

See, for example, United States v. L. Cohen Grocery Co., 255 U.S. 81, 41 S.Ct.

298, 65 L.Ed. 516.

7 Cranch at page 34, 3 L.Ed. 259. And see United States v. Coolidge, 1 Wheat.

415, 4 L.Ed. 124.

United States v. Sullivan, 274 U.S. 259, 263, 47 S.Ct. 607, 71 L.Ed. 1037.

327 U.S. at page 408, 66 S.Ct. at page 549.

Wilcox v. Commissioner, 148 F.2d 933.

127 F.2d 572.

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126 F.2d 723.

127 F.2d at page 573.

Ibid. The same reasoning can be found in our opinion in Alison v. United

States, 344 U.S. 167, 169170, 73 S.Ct. 191, 192, 97 L.Ed. 186.

127 F.2d at page 574.

E.g., Commissioner of Internal Revenue v. Smith, 324 U.S. 177, 65 S.Ct. 591,

89 L.Ed. 830 (compensation through exercise of stock option), led to 218 of

the Revenue Act of 1950, adding 130A to the 1939 Code, 26 U.S.C.A.

130A; Commissioner of Internal Revenue v. Tower, 327 U.S. 280, 66 S.Ct.

532, 90 L.Ed. 670; Lusthaus v. Commissioner, 327 U.S. 293, 66 S.Ct. 539, 90

L.Ed. 679; and Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733,

james v. united states, 366 u.s. 213 (1961)

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